Prudence is still the watchword, say economists

Yesterday Gordon Brown announced the biggest expansion in departmental spending by a government in modern times, and the longest sustained programme of expenditure growth in more than two decades.

Yesterday Gordon Brown announced the biggest expansion in departmental spending by a government in modern times, and the longest sustained programme of expenditure growth in more than two decades.

Public spending will rise by nearly 7 per cent in real terms this year and more than 2 per cent a year in the subsequent three years under the plans, which run from 2001-02 and 2003-04.

So without hyping the figures, Gordon Brown's giveaway is a substantial one. By the financial year 2003-04, annual departmental spending will be £43bn higher than in 2001-02 under the old plans.

Health and education are, as widely trailed, the big winners. NHS spending will expand from £40.2bn last year to £56.7bn by 2003-04, and the DfEE's budget rises from £15.5bn last year to £25.6bn.

The increase for the NHS was announced in the Budget, and details of how it will be spent will be in the national plan to be published next week.

There is also rapid growth in investment in transport and housing, to rise by 20 per cent and 12 per cent a year respectively in real terms.

The obvious question, then, is whether these increases can possibly be prudent, too. Michael Portillo, the shadow Chancellor, claims the Conservative proposal for expenditure growth of just more than 2 per cent a year in real terms, the same as the economy's trend growth rate, is more sustainable.

But Mr Brown has not abandoned his traditional prudence, say economists. Other spending is growing far more slowly than the departmental allocations, keeping down the total increase to 2.5 per cent over the three-year spending plan.

The £22bn raised from auctioning mobile phone licences, and proceeds from further auctions in the autumn being used to cut the national debt, will save the government about £1bn a year in interest payments by 2004. Thanks to near-full employment, social security payments are lower, too.

This means the mix of spending favours frontline services far more because these savings have been re-allocated to departmental budgets, keeping the totals the same as those in March's Budget.

The increases in the present financial year and planned for the next three also follow four years when spending either fell or barely increased in real terms. Over the six-year period to 2003-04, the annual average will be just over 2 per cent.

Government spending will continue to amount to about 40 per cent of GDP in the UK, a smaller share than in most other developed economies although much higher than the 30 per cent in the US. The tax share has climbed since 1997 to just over 37 per cent, and is now expected to decline slightly.

The Treasury's forecasts suggest the Government will continue repaying national debt for two more years. Even in an unexpected recession, there is little danger of breaking Mr Brown's two fiscal rules, that over the course of a business cycle current revenues should exceed expenditure, and that the national debt should be stable as a share of GDP.

No analyst in the City or elsewhere has serious worries about the public finances.

Carl Emerson, of the Institute for Fiscal Studies, said: "If there is a cyclical downturn, that would not pose any problems. If prudence is not spending money you haven't got, then this is prudent. It is being paid for by past tax increases."

The expert opinion backs the Chancellor's own interpretation, that higher spending comes "not at the expense of our prudence but because of our prudence".

But there is a different concern. Some economists believe rapid growth in government spending, which amounts to two-fifths of the economy, will force the Bank of England to raise interest rates. Several employers' organisations expressed alarm about this danger in their reactions yesterday. David Walton, of Goldman Sachs, said: "This statement does complicate monetary policy."

But not all shared this view. Robert Barrie, UK economist at investment bank Credit Suisse First Boston, said: "Looking at the public finances in the round, the consequences of this statement for interest rates are minuscule."

The Monetary Policy Committee was briefed by the Treasury on the spending review at its last monthly interest rate meeting, when it left rates unchanged.

Yesterday's statement was the first to introduce new, commercial-style accounting methods for the public sector. The new emphasis on setting specific targets for each department is part of a drive to improve efficiency, which will be made easier by the accountancy reform launched by the Conservative government.

This switch to "resource budgeting" will be phased in over several years, but already it means departments can carry over unspent budgets from one year to the next and will have new incentives to manage their assets more efficiently.

Mr Brown announced plans for asset and property sales worth £4bn a year up to 2004, money that will be channelled into public services.